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EFC Policy Recommendations

Recommendation: To improve outcomes and the borrower experience, Congress should reduce repayment options to two plans (standard and income-based).

Rationale: Through their work counseling borrowers throughout all stages of the education financing process — from when they first begin researching loan options until they successfully make their last payment — EFC members know first-hand that the current repayment process is far too complex for even the most well-informed borrower.

According to the Urban Institute, “The strongest consensus on reforming federal student aid centers on the need for simplification. There are too many different programs with too many different provisions. Multiple types of federal student loans as well as multiple repayment plans add layers of complexity to student loan repayment.”

For example, for borrowers with Direct Loans and Federal Family Education Loan Program Loans, there are currently eight different repayment plan options, all with differing eligibility and terms. There are also dozens of deferment, forbearance, and forgiveness programs, each carrying their own confusing array of terms and conditions.

Improve Income-Driven Repayment (IDR)

Recommendation: Create a mechanism for borrowers to give the Education Department advance permission to automatically access their tax information for the limited purpose of determining eligibility for all IDR plans.

Rationale: Student loan borrowers in repayment have a large number of options, including six different plans that base payments on a borrower’s current income — often referred to as IDR plans. Under IDR plans, some borrowers have no monthly payments, and some borrowers have their remaining balances forgiven. Eligibility requirements differ for each plan, and federal law requires borrowers to update their financial and demographic data on an annual basis to stay enrolled in an IDR plan.

Education Department data shows that 57 percent of borrowers enrolled in IDR plans do not recertify their incomes as required before their deadlines. When a borrower doesn’t recertify their data on time, they are required to make higher monthly payments — which are not based on income and which may cause financial distress. Additionally, any unpaid accrued interest capitalizes, increasing the total cost of the loan.

According to the Education Department, one-third of those borrowers who did not recertify their incomes on time had their loans go into hardship-related forbearance or deferment.

Implementing multi-year consent will help ensure that struggling borrowers who are eligible for an IDR plan are able to stay in that plan without interruption.

Provide Free Counseling to At-Risk Borrowers

Recommendation: Create a pilot program that would leverage existing state-based and nonprofit organizations to provide free counseling services to distressed student loan borrowers and use the data from this study to support expansion of these services to all states.

Rationale: Similar to the National Foreclosure Mitigation Counseling Program (NFMCP) created to help struggling homeowners recover from the financial crisis, EFC recommends the creation of a program to assist financially distressed student loan borrowers. It is our belief that with the plethora of repayment plan options, there is no reason for any borrower to default on their student loan. However, most borrowers are unaware that the programs exist or find navigating the myriad repayment options too difficult.

In the same way that NFMC leveraged community-based nonprofit organizations, our proposal leverages existing state-based and nonprofit organizations who have experience in counseling families on planning and paying for college. These organizations would provide the proposed counseling services to distressed borrowers in their states; services would include one-on-one counseling by phone or in-person to help borrowers get back on track and into a repayment plan that best meets their specific needs.

Like NFMCP, this program would be funded through Congressional appropriations, first on a pilot basis. Specific metrics would be set to measure success and to determine if additional funding should be made available to expand services beyond the pilot program.

State-based and nonprofit organizations are limited by funding; this program would allow them to expand their services to a highly targeted population of at-risk borrowers.

Success will be defined through a set of metrics that account for the program’s success in reducing delinquency and default among program participants. Early success will be measured by decreasing the number and percent of borrowers in delinquency among a targeted cohort of borrowers. Longitudinal metrics will be established to measure recidivism rates to ensure the early success is sustained over time.